by Al MartinCentral Banks Make Last Gasp Effort to Save Global Economy
(3-17-15) As mentioned in previous Al Martin Raw articles, every week now yet another central bank is joining the interest rate fray in the new race to the bottom.
Not only do we have a global currency race to the bottom, but now a global interest rate race to the bottom, wherein banks are falling all over themselves to cut rates in a desperate bid to provide some monetary stimulus.
The new money trade -- US Dollar/ Euro -- that all of us traders are piled on top of because like the oil trade, it’s a “guaranteed” short trade because, like Oil -- Euros have no place to go but down.
We consistently keep selling the Euros and covering them a day or two later. We have seen – since the European Central Bank (ECB) has formally begun their next QE (Quantitative Easing) program – which formally began last Monday - Euros have already fallen 600 basis points (a basis point being 1/100 of a percent) against the US Dollar.
This is happening because of the uncertainty about what ECB head Mario Draghi was going to do with this Quantitative Easing program which is now the 4th Quantitative Easing program for Europe. The Fed has gone through 3 rounds of QE in the United States.
Meanwhile Bank of Japan Governor Koroda has launched Japan’s (Good Ship) QE 3. All the central bank governors are tripping all over themselves in a desperate bid to provide monetary stimulus, while governments are completely disorganized and at a standstill and unable to provide any substantial fiscal stimulus through tax reduction, which would normally be done. Then the burden falls on the central banks to do double duty, as we have pointed out before.
People have asked me regarding Greece’s financial woes – is this a liquidity problem or a solvency problem? The Greek situation is slowly coming to some sort of a head and the Europeans keep backing down in an effort to keep Greece in the so-called “European Union.” But frankly I would think that the decision has already been made to kick Greece out. They just don’t want it done so soon.
In yet another ploy Germany’s Finance Minister Wolfgang Schaeuble has asked -- how long do we keep them in and for what reason? The speculation is that both the Germans and the French would like to see Greece remain in the European Union for another 18 months, particularly if they can keep them in at what they would consider to be a “modest” cost – another $10 billion or so. In other words – to keep them alive – on a drip, so to speak. A Euro drip – to at least keep Greece afloat for the next 18 months – or until the 3rd quarter of 2016.
At the same time -- we have the conundrum of the central banks which is a case of growing desperation to try to keep the planet’s economy solvent in a growing deflationary environment, where commodity prices – virtually across the board but particularly industrial and fungible commodities or those commodities directly linked to economic growth -- are declining in value. This includes oil, industrial metals, soft and tropical commodities. These are the commodities which are a reflection of economic growth – which are continuing to fall in value.
Meanwhile treasury bonds globally from the principal issuing states are continuing to rise in value.
So what’s the endgame? A lot will be foretold, as we have stated before, by what the planet’s economy looks like by the end of 2015. By then we will see if the ECB is having any success in reviving GDP growth in the Euro Zone through purposely maintaining a policy of ever increasing negative interest rates. And in the liquidity they are providing - can they avoid a “liquidity trap”?
So what does “negative interest rates” really mean? The entire concept of Quantitative Easing is to drive down interest rates because lower interest rates is supposed to mean higher economic growth.
The problem is that nobody is borrowing money since the money that goes into QE is simply used by the banks to get a guaranteed overnight payback from the central banks.
The tangential effect is that it lowers benchmark rates, i.e. the cost of borrowing. Now even in a nation of millions of part-time waiters, the borrowing continues and you can still see borrowing in the monthly credit statistics of consumer credit numbers. We can look at the monthly consumer credit numbers in the United States, which is a measure of total installment credit – i.e. how much money was borrowed by installment during the month. You see that it had been averaging about $15 billion a month but is now only averaging about $10 billion a month – which clearly indicates that borrowing has slowed down.
However there is a direct correlation to borrowing – either at the consumer level or by business and industry – to interest rates. The more that interest rates will fall -- the more affordable credit becomes. This is simply the manipulation of interest rates – not the so-called unseen hand mentioned by Paleo-Capitalist Adam Smith.
You can see billboards in Miami which advertise leasing a Maserati Ghibli for “just” $699 a month and ads for leasing a Fiat for “just” $99 a month. And that’s not surprising since automobile leases have been one thing that car companies have been targeting since lease sales have been declining.
The reason automobile sales have picked up so much in the last 6 months – in the United States, Japan and Europe and even China even though their GDP is falling is because the cost of owning an automobile is that something that automobile companies and governments have been specifically targeting.
It appears that all we can see is corporate stock buy-backs because corporations are generating a huge amount of money – and they literally don’t have anything they can buy with it. Classically they would purchase longer-term Treasury Bonds. The problem is that in the falling interest rate environment we have a case – which bespeaks of a dangerous situation which is what happened in 1929 and 1930 – where the yield on the 10-year Treasury Bond is now below the median yield of the S&P 500. This is a negative sign because it means that companies cannot invest as they normally would in interest-bearing instruments for the dividend.
Thus what corporations invariably do to counter this is they’ll buy back their own stocks by buying back the shares they have outstanding. Therefore their earnings per share actually increase – even though they’re not earning any more money. And that’s how they’re able to maintain their dividend. That is always a dangerous sign when global equity benchmarks like the S&P 500, the European ESX 600 or the Nikkei 225 Stock Index when the median yield of stocks listed is now greater than is the 10-year government bond issuing country.
In conclusion we will know more by the end of this year 2015. If the ECB is unable to pick up and provide more growth in the GDP through continuously lower interest rates and by pounding the Euro lower which helps European exports. This is what they’re trying to do. But if it doesn’t increase GDP – even in China where the Chinese government said it will and if the Japanese QE cannot increase inflation and GDP in Japan – then it will be a sign that we are much closer to the Dark Clouds on the Global Economic Horizon than the shills on CNBC would lead the public to believe.
It should be noted that the Greek situation is not creating the ripples in markets that it used to do because it’s viewed increasingly as a sideline issue since everyone knows what the equation is – the Greek Communists have to give enough so that they stay in the European Union now and try to remain in power in Greece at the same time.
Also the Europeans know that they have to give in enough to keep Greece on a Life-support mechanism because they can’t afford to write off the debt. A Greek default at this moment would represent a failure.
Both parties understand that they must come to an agreement.
In other words Greek Prime Minister Tsipras’s threat of a holding a referendum in Greece on leaving the EU is just posturing because both parties know what the bottom line is – they have to come to terms. The Greek government has to have a trickle of money so they too can have their offshore accounts established for when it falls apart.
So -- the "Troika" still rules…

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.